The fine line between bad luck and rogue trades


No change to September revenue forecast of HK$20-22BN.



Despite investor fears of a slowdown, Macau had another outstanding week and remains on pace to hit the midpoint of our previous HK$20-22 billion estimate for the full month of September.  Average daily table revenue of HK$689 million this past week was almost exactly in-line with the prior week and slightly above the month to date average of HK$686 million.  Our full month projection assumes a slowdown in the last 4 days of the month which is typical heading into Golden Week.


Golden Week, from Oct 1st thru Oct 9th, should be the busiest period of the year.  We are hearing that hotel rooms are fully booked and that the Junkets and Promoters are geared up for a record holiday.  


In terms of market share, as expected, Wynn continues to recover from low hold experienced earlier in the month and MPEL’s share moderated from record highs.  However, MPEL is trending well ahead of trend and remains on track for a blockbuster quarter.  Galaxy looks like it hit a homerun on the luck side this past week as its MTD share went from 16.3% last week all the way up to 19.1%.




Last week, ARCO was down 15% underperforming the S&P 500 by 850bps.  The underperformance was not surprising given the MACRO environment, especially for the commodity centric countries.  Yesterday, the macro team suggested that last week moves in Latin American financial and capital markets are signaling a very bearish outlook for the regional economy.


As measured by our recent meeting with management and consensus estimates moving up by 2.8% last week, the fundamentals for ARCO remain strong 3Q11.  The following is taken from the Hedgeye Macro team Latin America Risk Monitor.    




Latin American equity markets got completely tagged last week, closing down -7.2% wk/wk on a median basis. The cap-weighted MSCI EM Latin America Index (Brazil, Chile, Colombia, Mexico, and Peru) actually closed down -13.6% wk/wk as the Flight to Liquidity trade continues to roil emerging market assets worldwide. This was confirmed in the FX market as well, with the region’s currencies depreciating nearly a full four percent wk/wk vs. the USD on a median basis.


Latin American sovereign debt markets sang a similar tune, with yields generally backing up across the curve throughout the region. Brazil’s 2yr sovereign debt yields posted a noteworthy negative divergence on expectations of more dovish monetary policy, as indicated by the -20bps wk/wk decline in the country’s 1yr on-shore interest rate swap. From a credit quality perspective, Latin American 5yr CDS widened fairly dramatically wk/wk, with Brazil, Chile, Colombia, Mexico, and Peru all posting percentage gains north of +30%. With the exception of Chile – the region’s highest rated sovereign credit – 5yr CDS quotes for these countries have nearly doubled in the YTD.




Brazil: The key developments out of Brazil in the past week largely centered on the real’s plunge vs. the USD (down -15.3%

over the past two months, making it the 2nd-worst performing currency in the world over that time period). The declines were met with central bank action, as the bank stepped into the market to mitigate declines by auctioning currency swap contracts (112,290 in total with maturities between Nov and Jan). This effort, which is equivalent to selling dollars in the futures market, reverses a 28-month-old trend of implementing policy designed to limit real appreciation. With renewed speculation of a Greek default swirling about the financial media, Brazilian policymakers were quick to act in support of their currency.


The real, which declined -32.3% in the five months through Dec 31, 2008, is a major source of worry for Brazilian officials – which explains the hard line stance of defense provided by the central bank (per monetary policy director Aldo Mendes’ recent commentary). Aside from exacerbating the external debt burdens of the sovereign and Brazilian corporations alike, the real’s rapid depreciation also threatens to continue undermining Brazilian capital markets and make the cost of financing business ventures prohibitive for Brazilian corporations. For example, the cost of short-term trade financing for Brazilian investment grade companies has more than doubled this month (1yr credit line export contracts now cost 2.85% vs. 1.35% 1mo ago) and is fueling speculation that the central bank will have to step in to support this market as they did back in ’08.


All told, the real’s global underperformance vs. the USD of late is largely a function of a series of Big Government Intervention designed to limit real appreciation – inconveniently at the top of the global economic cycle. The cumulative effect of the measures, which included a tax on foreign currency derivatives transactions, caused foreign wagers for real appreciation (vs. the USD) to fall -85% from July’s record high of $25.6 billion in futures and dollar spread contracts. Now, Brazil is backpedaling as its currency suffers the most as a result of these capital controls:


“We established regulatory measures exactly for that, to add and take away. The IOF is one of those; we introduced it, then we can take it away when it’s no longer needed. We are always looking at all the possibilities, but there is no decision.”

-Finance Minister Guido Mantega (9/23)


Mexico: The Mexican peso, which just snapped its longest losing streak on record last Friday is in a similar boat as Brazil – though largely for a different reason (Indefinitely Dovish monetary policy as opposed to Big Government Intervention). The peso, which is down over -14% vs. the USD over the past two months is facilitating foreign liquidation across Mexican financial markets, headlined by the -13.2% loss for peso-denominated sovereign debt in the month-to-date (vs. +2.5% for U.S. Treasuries and an -8.2% average across all emerging markets). Central bank governor Augustin Carstens believes that peso weakness is “transitory” and expects it to “resume its upward trend” along with other Latin American currencies.


Clearly Carstens is modeling in a near-term inflection point in the global economic cycle – an outcome not being priced into any of the macro markets we monitor globally. This view is likely to leave the Mexican central bank on the sidelines for now as it relates to meaningfully supporting the peso in the FX market – potentially paving the way for further declines. As interest rates continue to back up and increase the cost of capital for Mexican corporations and consumers, we expect growth south of the border to continue slowing – just as we called out in early 2Q when we first went negative on the Mexican economy and its stock and currency markets.


Colombia: The key callout out of Colombia last week is undoubtedly the government’s decision to scrap a $240 million bond issue for the rest of year, citing “global financial turmoil”. The key takeaway here is that if the Colombian government is finding it hard to raise debt capital, we don’t think many Colombian corporations are able to do so either. Growth tends to slow when capital markets dry up.


Elsewhere in the Colombian economy, Finance Minister Juan Carlos Echeverry, who put his own job on the line if the Colombian unemployment rate doesn’t improve to single digits by year end (11.3% currently), did reiterate his forecast for Colombia to grow 5% next year. We interpret this as they’ll be quick to quick to fire the stimulus gun to help achieve this goal should Colombian economic data start to come in negative on the margin. He is also keen on maintaining national confidence so that financial intermediation can continue to support growth. This may prove to be a tall order, given the global economic backdrop.


Argentina: Continuing with the theme of capital flight, which is currently on pace for the largest yearly amount on record, new data does indeed confirm that Argentina is likely to run out of money to defend its currency, the peso, in 2012. Based on a law that FX reserves are not allowed to fall below the monetary base (put in place for this exact reason – to protect against capital flight), we can now see that Argentina has only a $3.4 billion buffer before FX reserves hit this dreaded level. To complicate matters, President Cristina Fernandez’s 2012 budget includes a $5.7 billion provision of FX reserves for international debt service. Moreover, Argentina’s inability to access international debt capital markets (especially in times of global stress) all but guarantees this payment is made – perhaps alongside other FX reserve-financed social spending in the event of an economic downturn (which we’d argue is already happening given that Argentina systematically underreports inflation by 10-15% – artificially boosting GDP growth on a real-adjusted basis).


Argentina’s FX reserves, which have declined by -5.8% YTD to $49.1 billion, are largely a function of trade revenue from agricultural commodities (over 50% of exports per Bloomberg). With our call for Deflating the Inflation to continue, over the intermediate term, we think the market will continue to price in a peso devaluation at some point over the next year to get reserves to a comfortable level when compared to the monetary base. This is what the FX market has been sniffing out and is largely the reason why the blue-chip exchange rate (a market that intensifies during bouts of capital flight) is trading at a -10.4% discount to the spot market rate (vs. the USD). The capital flight ahead of a perceived currency devaluation has pushed up yields on Argentine peso-denominated bonds due in 2033 +361bps YTD to 10.51% vs. an increase of “only” +283bps on Argentine dollar bonds. All told, we are bearish on the Argentine peso (and Argentinean assets in general from a USD perspective) until the FX reserve issue is adequately addressed – a resolution we don’t see taking place anytime soon.


Darius Dale














Shorting Hong Kong Equities – Trade Update

Conclusion: We are sticking to our guns on the short side of Hong Kong equities.


Late last Friday, we shorted Hong Kong equities in our Virtual Portfolio; this is consistent with the research view we’ve held since 2Q. On May 24th, we formalized our bearish research view of Hong Kong equities in a lengthy note titled, “Hong Kong Is Not Mainland China” (email us if you’d like a copy of the report). The conclusion of the note was as follows:


“The combination of slowing growth, accelerating inflation, and a property bubble that will either pop or continue to be addressed from a policy perspective has us bearish on Hong Kong equities over the intermediate-term TREND.”


That thesis is largely still intact, with the exception that we believe Hong Kong inflation has already peaked for the current cycle – largely due to a +7.9% YoY pop experienced in July as a result of a property subsidy in July ’10. Without such on-off factors, inflation in Hong Kong would have accelerated to +6.3% YoY in July and has since slowed to +5.7% YoY in August. While slowing inflation might prove bullish for most economies in the sense that they can cut interest rates, Hong Kong is in “the box”, with rates already near ZERO percent due to the currency peg with the USD:


Shorting Hong Kong Equities – Trade Update - 1


Even though we expect Hong Kong CPI to continue trending down over the intermediate term, we expect it to remain as sticky as any CPI readings globally form an absolute perspective, given that inflation in Hong Kong is largely being perpetuated by a property price bubble. Hong Kong property prices, up +71% since the start of ’09 and +2.1% above the prior leverage cycle peak just before the Asian Financial crisis (per Centaline Property Agency data), have been driven higher largely by an influx of mainland Chinese buyers looking for healthy inflation adjusted returns amid a crackdown on domestic property speculation. Additionally, the yuan’s +7.2% increase vs. the Hong Kong dollar over time period has indeed made Hong Kong property cheap on an FX-adjusted basis. Burgeoning retail rents (up +27% since the start of ’09, per Collier International) are contributing to supply-side price pressures that we don’t see easing absent a bursting of the world’s most expensive property market – per a recent study by Demographia International that ranks Hong Kong dead last among 325 global property markets with a median house price at 11.4x gross annual median income (nearly double that of New York City’s 6.1x ratio!).


Shorting Hong Kong Equities – Trade Update - 2


Now Hong Kong is in a catch-22 scenario, whereby a property bust could spell disaster for the Hong Kong banking system or allowing the “fun” to continue and put pressure on consumer price inflation – risking an acceleration of this year’s well-attended protests as consumers become increasingly disgruntled with prices as wage growth slows due to waning economic growth. It’s worth highlighting that Hong Kong is among the world’s most sensitive economies to the global economic cycle (exports > 200% of GDP) – a cycle we’ve been appropriately bearish on YTD and continue to be bearish on for the intermediate-term TREND. Manufacturing growth is slowing; export growth is slowing; and the trade balance is compressing at an accelerating rate on a YoY basis:


Shorting Hong Kong Equities – Trade Update - 3


Shorting Hong Kong Equities – Trade Update - 4


A 13yr-low in unemployment (3.2% in Aug) will keep the wheels from completely falling off of the economy, but this story isn’t about consumer demand. No, it’s more about a government that is in “the box” from a policy perspective and must sit idly by as the global economy dictates its growth rate. As such, we anticipate that lower-lows are more than likely on the horizon for Hong Kong economic growth over the intermediate term.


Darius Dale



Shorting Hong Kong Equities – Trade Update - 5


Business remains resilient in the face of economic concerns and while MAR won’t be aggressive, investors appear to be discounting significantly lower forward estimates.



Marriott will kick off 3Q earnings season next week.  While estimates have come down by 10% since their last earnings call we are still 3% below consensus for EPS and EBITDA given the continued drag of MAR’s DC exposure and lag effect of the company’s large group and convention business. 


That said, MAR’s stock is also down 25% since their last call, so I think it’s safe to say that investor expectations are not high for the quarter and there is a lot of fear built into future projections.  Like most if not all lodging names, the number one driver for this stock will be driven by the forward macro view.  We believe that most investors are at least partially pricing in a double dip and RevPAR potentially going negative over the next 12 months.  


We certainly wouldn’t want to own anything in lodging into a double dip; however, for the next quarter at least, we do expect RevPAR trends to accelerate as we wrote about in "LODGING: REVPAR REVS UP" (9/9/11).  In fact, September MTD RevPAR numbers have already improved.  If the economy continues to chug along at status quo levels, we think that MAR is a compelling story.  Valuation is at March 2009 trough levels, cash flow is significant and could surprise on the upside, and the timeshare spin off is a strategically value added transaction.



Here are our projections for the quarter:


We estimate that Marriott will report Adjusted EBITDA of $234MM and EPS of $0.26 – about 3% below the Street. 

  • World Wide RevPAR projected at 5.2% (non-comparable) and system-wide room growth of 2.6%
  • Marriott’s outsized exposure to the DC market will continue to be a drag on their RevPAR results in NA.  DC RevPAR from MAR’s 3rd FY quarter tracked down 1.2%, driven by negative ADR and flat YoY occupancy.  Approximately 5% of MAR’s domestic system-wide rooms are located in the Greater Washington, D.C. market and in 2010 the region contributed roughly 6% of MAR’s worldwide fee revenue and 13% of total incentive fees.
  • We estimate owned, leased, corporate housing and other revenue of $243MM – inclusive of $20MM of branding fees and $4MM of termination fees.   We assume a loss of $2MM on the core business compared to a loss of $12MM in 2Q10, and a 100% margin on branding and termination fees for total gross profit of $23MM.  In 2Q10, gross profit margin was only $7MM.
  • We estimate total fee revenue of $283MM – lower than MAR’s guidance of $285-295MM
    • $135MM of base management fees, up 9.4% YoY
    • $123MM of franchise fees, up 12.4% YoY
    • $26MM of incentive fees, up 25% YoY.  Assuming our base management and franchise fees are accurate, incentive fees would need to be up 55% YoY to hit the mid-point of management guidance. 
  • We estimate timeshare contract sales of $167MM, $267MM of sales and service revenue, and segment results of $27MM.
    • Down payments on sales, net of all incentives for financed timeshare sales need to equate to at least 10% of the purchase price according to GAAP before they can reported in current period revenue. In 2Q timeshare segment results were negatively impacted by a higher percentage of sales not meeting the reportability threshold and therefore ending up as deferred revenue. A good part of those sales should be recognized this quarter.
  • $165MM of G&A, which should trend higher QoQ as 2Q results included several one-time items including reversal of a $5MM loan loss provision and lower than expected workout costs which MAR believe will incur later in the year.  2Q also included $3MM of fees associated with the timeshare spinoff – which will likely also be present in 3Q.
  • $34MM of net interest expenses – same as 2Q and below guidance of $40MM




Notable macro data points, news items, and price action pertaining to the restaurant space.




The latest ICSC index fell 0.2%.  We now have been in a downward trend that has been occurring since late July.  Consumers have not stopped spending, but growth remains only modest.


Alcohol not a panacea for all restaurants - NYT.




Sanderson Farms added to Conviction Buy List at Goldman Sachs






MCD - is reprising its popular traffic-driving Monopoly Game promotion beginning Tuesday at its nearly 14,000 U.S. restaurants - stop on by your local arches and purchase any of the following menu items:

  • Medium Fountain Drinks (2 pieces)
  • McCafe Smoothies (2 pieces)
  • Hash Browns (2 pieces)
  • Big Mac® (4 pieces)
  • 10-piece Chicken McNuggets (2 pieces)
  • Egg McMuffin (2 pieces)
  • Oatmeal (2 pieces)
  • Filet-O-Fish (2 pieces)
  • 20-piece Chicken McNuggets (4 pieces)
  • Large Fries (4 pieces)

According to GRUBGRADE this is the best time of year to buy Hash Browns, as they remain the cheapest way to collect game pieces. The contest will run through October 24th.




DPZ and JACK at the Telsey conference today






DRI - Reports EPS tomorrow


PF Chang's announces departure of COO Richard Tasman at the end of FY11




Howard Penney

Managing Director



Rory Green


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